The Business Advisor Nondisclosure Agreements Protect your business information. by Mary Hanson

Nondisclosure agreements are becoming more common in the business world. The value of information is recognized. Even small businesses more often have employees, vendors, customers, and others sign nondisclosure agreements to protect proprietary information.

The most common questions about the use of nondisclosure agreements revolve around when to use a nondisclosure agreement, what a nondisclosure agreement should contain, and whether a nondisclosure agreement is enforceable.

The following are some "rules" to consider regarding the use of nondisclosure agreements (also called "confidential disclosure agreements" or "confidentiality agreements"):

* A nondisclosure agreement should be used any time business information is to be revealed to vendors, customers, potential buyers, potential business partners, and any other party. It generally doesn't work if you disclose information without restriction to one party and then want another party (or the same party) to regard it as confidential.

* Have all employees sign a nondisclosure agreement to protect the valuable information employees have access to.

* Identify the information to be protected. You may wish to protect customer lists, designs, procedures, methods, customer information, marketing techniques, computer programs, identities of subcontractors, or pricing information. All of these, and almost anything else that has business value, can be protected as confidential information. In addition, determine whether copyright protection or patent protection should be sought for some information that might qualify for such protection.

* Review policies and procedures for protecting the information from improper disclosure in the work place. It won't make sense to have nondisclosure agreements signed, if the way information is handled is not controlled.

* Don't rely on agreements to protect the information. Rely on protective procedures, with the nondisclosure agreements as a back up. Do not disclose more than necessary. Do not disclose it until it is necessary. Do not disclose it to more people than necessary. Lock up information and log it in and out.

* Consider how valuable the information is, and improve procedures to a level appropriate for the value of the information protected.

* Consider whether a nondisclosure provision should be added to other agreements used in the business.

Contents of a Nondisclosure Agreement

There are certain issues that every good nondisclosure agreement should cover. Although, as with any contract, the terms need to be tailored to fit the particular circumstances, the following are some of the issues that should always be considered in this type of agreement:

* The definition of "proprietary information" or "confidential information" to be protected. If this definition is too broad or vague, the agreement can't be enforced. This description needs to define the confidential information well enough to be enforceable, yet not disclose the confidential information itself.

A common problem in enforcing nondisclosure agreements is that the definition or description of the information to be protected is unclear. Trying to cover too much information by defining the confidential information as "all business information" may backfire. It is important to try to identify particular information, without giving out valuable information.

Another concern is that the agreement may state that the information to be treated as confidential will be marked "confidential." If the agreement establishes this as the method for identifying confidential information, you need to make certain your information is marked! If your procedures for marking information aren't reliable, don't use this as your method of identification of confidential information.

* Description of what the information may be used for (e.g., for the purpose of reviewing a potential purchase of the business).

* Agreement that the confidential information will be protected from disclosure to third parties.

* Agreement that the confidential information will be protected from any use other than the use authorized under the agreement.

* Agreement that no copies would be made of the confidential information except as authorized under the agreement.

* State the period of time that the agreement not to disclose will continue. If this is to be as long as you or your successors are utilizing the information, say so.

* Include a statement that the agreement to maintain confidentiality will survive termination of the agreement. This is most important when the nondisclosure agreement is part of an agreement with its own termination date. Your need to have the information protected from disclosure will last longer than many of your contracts with customers, subcontractors, suppliers, and employees.

* Since a business cannot treat public domain information as its own proprietary information, and to mislead its employees or others into treating it as such would be improper, the agreement might make clear that information in the public domain is not proprietary information under the agreement and that information received by the individual without breach of the nondisclosure agreement is not proprietary information.

* If someone else independently comes up with the same information, without use of your information, you cannot prevent the use of that independently obtained information. This is typically mentioned in a nondisclosure agreement.

* You may protect the fact that you are using public domain information, or information that is well known in your industry. It's not the basic information that is your confidential information, but the fact that you are using it. If this is something you wish to do, make sure the protective steps taken and the definitions of "confidential information" support you.

* Consider adding a provision to the agreement covering remedies. What if the agreement is breached and information is used or disclosed? You may wish to indicate that the loss of confidentiality cannot be compensated for with money alone, and that, consequently, the business should be entitled (in addition to financial remedies) to get an injunction to prevent the recipient of the information from disclosing the information.

Such a provision sets the stage for the business owner to get an injunction against the individual who breaches the agreement to prevent further disclosure or use. It can be difficult to get an injunction without such an agreement.

* Consider whether it is appropriate to have the party receiving information agree to have all their employees who will have access to the information also sign a nondisclosure agreement. You may wish to make sure those employees sign an agreement containing the same terms and definitions of confidential information as their employer.

The importance of protecting confidential information often comes to light only after a former employee or other business associate begins competing, using information obtained from the business relationship. Since laws in many states, including California, protect the right to compete, the ability to stop a former employee or business associate from competing is strongest if the protected status of the information is well established, long before any competitive situation arises.

California statutes provide protection for "trade secrets." Although it seems to provide broad protection of confidential information, the clearest way to take advantage of such laws is to have written agreements signed and procedures in place for the protection of the information. This enables the business to establish that certain information was valued by the business and met the requirement of being protected from disclosure. Without this being established by an agreement, it may be difficult to prove that the law applies to your information.

Taking steps to protect your business information is always a good thing to do. Even if the information turns out to have little value, the protective steps may benefit the business. If the information turns out to have greater value than originally thought, having maintained its secrecy can be of significant value.

There is no substitute for taking protective action early on. One cannot reverse the harm of disclosure.

© 2000 Mary Hanson All rights reserved.